How Does Risk Selection Respond to Risk Adjustment? New Evidence from the Medicare Advantage Program
- (pp. 3335-64)
Abstract
To combat adverse selection, governments increasingly base payments to health plans and providers on enrollees' scores from risk-adjustment formulae. In 2004, Medicare began to risk-adjust capitation payments to private Medicare Advantage (MA) plans to reduce selection-driven overpayments. But because the variance of medical costs increases with the predicted mean, incentivizing enrollment of individuals with higher scores can increase the scope for enrolling "overpriced" individuals with costs significantly below the formula's prediction. Indeed, after risk adjustment, MA plans enrolled individuals with higher scores but lower costs conditional on their score. We find no evidence that overpayments were on net reduced.Citation
Brown, Jason, Mark Duggan, Ilyana Kuziemko, and William Woolston. 2014. "How Does Risk Selection Respond to Risk Adjustment? New Evidence from the Medicare Advantage Program." American Economic Review, 104 (10): 3335-64. DOI: 10.1257/aer.104.10.3335Additional Materials
JEL Classification
- G22 Insurance; Insurance Companies; Actuarial Studies
- H51 National Government Expenditures and Health
- I13 Health Insurance, Public and Private
- I18 Health: Government Policy; Regulation; Public Health